Unanticipated FOMC Shocks and Sectoral Equity Returns: An Event Study Using the 2-Year Treasury Yield

Sammanfattning

This study examines how unanticipated interest rate shocks affect the returns of five U.S.sectoral ETFs between 2008 and 2025, using daily changes in the 2-year Treasury constantmaturity yield on FOMC announcement days as a proxy for monetary policy shocks. Thestudy analyzes 147 FOMC meetings across a period that includes the Great Financial Crisis,the Zero Interest Rate Policy era, and the post-pandemic hiking cycle. To isolate sectorspecific reactions from the broad market movements, the S&P 500 is included as a controlvariable. A dual framework methodology is used, combining standard OLS regressions on acleaned dataset with robust MM-estimations on the full dataset across both a narrow and wideevent window.The results reveal heterogeneity in how sectors respond to interest rate shocks. The financialsector (XLF) shows a consistent and statistically significant positive idiosyncratic reactionacross all multiple regression models, consistent with the Net Interest Margin theory whereasset repricing is done faster than the liability repricing. The consumer discretionary sector(XLY) shows a negative reaction in five out of six models, consistent with credit and financialconstraint theories, although the effect loses statistical significance in the wide robust model,suggesting the reaction is conditional rather than structural. For the remaining sectors therewere no consistent idiosyncratic reactions that could be isolated from broad marketmovements. Particularly XLK was showing instability due to the structural overlap with theS&P 500 as control variable. Overall, the findings confirm that sector-level analysis revealsmeaningful differences that broad market indices alone would not capture.